Printer Friendly

ASEAN and EC -- 1992.

The author is a Senior Research Fellow at the Centre for European Policy Studies, Brussels.

This paper examines the effects of the European Communitys 1992 programme for completing the internal market on economic relationships with the ASEAN countries. These relationships involve not just trade in goods but trade in services, such as air transport and very importantly, investment. Although there may be problems in some sectors the analysis concludes that the likely growth of the EC and the very rapid growth of ASEAN both as a market and a producer will ensure a favourable impact all round.. Even integration with Eastern Europe is unlikely to alter that picture.

ASEAN, the Association of South East Asian Nations, comprises the fastest growing countries of the world economy. Apart from including the only NIE (newly industrialising economy), not having encountered domestic political or social growth constraints-Singapore, with 11 per cent real growth in 1988, 9.2 per cent in 1989 and 10 per cent, first quarter 1990-it consists of recent record holder Thailand (with growth rates above 10 per cent for three years), Malaysia growth in the 7 per cent-9 per cent range), Indonesia (recent growth 6-7 per cent), Philippines (oscillating growth due to internal instability) and Brunei (an oil-exporting sultanate). The ASEAN countries do not owe their growth to the integration of ASEAN countries into a free trade area, a customs union or a common market. Intra-group trade liberalisation and economic cooperation are still modest. These growth marvels owe their performance to exports, especially to the OECD countries. The quality and very high growth rates of exports were and still are fostered by foreign investment and imports of intermediate inputs from the target markets.

It is important for the EC to strengthen its economic ties with this buoyant and promising region. ASEAN's import demand increasingly reflects rising income levels, providing great export opportunities for EC product and services suppliers. ASEAN's performance is itself a main factor in the development of intra-area trade in the Asia-Pacific region, by far the most dynamic area in the world economy.

The strength of ASEAN industry and services is already making itself felt in the European market and the product range of their industrial export goods and the scope of their services is widening rapidly. Soon ASEAN firms will begin to make direct investments in the EC, Eastern Europe, or Turkey so as to benefit better from the promising decade Europe has before it.

It is in this light that the relation between European integration, especially 1992, and ASEAN should be viewed. This paper discusses the likely impact of 1992 on ASEAN in agricultural food and industrial exports, services and direct investment. However, three basic ingredients for answering these questions are surveyed first: a bird's eye view of ASEAN-EC economic relations, a closer look at ASEAN's trade with the Community and an overview of the external dimension of 1992.

ASEAN-EC economic relations: a bird's eye view Economic relations between EC and ASEAN are dominated by five aspects: trade in goods, trade in services, direct investment, development aid and efforts evolving from the EC-ASEAN Cooperation Agreement (signed in 1980, renewed and extended in 1986 and in 1990). By far the most important is goods trade, linked with business services (such as financial and shipping), air transport primarily linked to tourism and EC direct investment in the region.

In goods trade ASEAN has strengthened its position in the EC from a 1975 share in EC overall imports of 1.8 per cent to a 1989 share of 3.4 per cent. Since EC imports are dominated by EC and other OECD countries (EC + EFTA already provide roughly three quarters of all EC imports), the relevant share to observe is that of ASEAN in the EC imports from all developing countries: this share has risen from 3.9 per cent in 1975 and 6.8 per cent in 1985 to 10.3 per cent in 1988. The competitive performance is impressive over a wide product range: the share increase is due just as much to products which are becoming relatively less important for overall ASEAN exports, such as food (ASEAN share of EC imports from developing countries rising from 10.1 per cent in 1975 to 13.8 per cent in 1988) and raw materials (from 23.4 per cent to 30.5 per cent), as it is to manufactures (up from 8.7 per cent to 14.8 per cent) which increasingly dominate overall ASEAN exports. it is also noteworthy that such increases in EC import shares took place despite ASEAN's export concentration in product categories encountering EC protection, such as agrictulture/food (the Common Agriculture Policy (CAP) in general; Voluntary Export Restraints VERS) in agriculture), textiles and clothing (the MFA and its bilateral enforcement by EC member states), footwear and consumer electronics. Moreover, ASEAN does not enjoy special preferences like the ACP and non-EC Mediterranean countries do, except for GSP treatment. However, as Langhammer and Sapir (1987) have shown, the relatively modest opportunities that GSP might offer for ASEAN have largely remained unexploited due to a byzantine system of exceptions, tariff quotas and GSP alterations which the EC has imposed.

It would appear, from the scant data which are available, that ASEAN is showing quite a good performance in services trade with the Community. In the only recent empirical study, Langhammer (1989) finds that, in 1987, revenues for private non-factor services accounted for 24 per cent of total (goods and services) exports from ASEAN to West Germany and 19 per cent in the case of France. He also finds 10 per cent for the Netherlands but this figure is perhaps not fully comparable. In the German case ASEAN holds higher shares in German imports of services (1987: 1.8 per cent) than in goods imports (1987:1.5 per cent). The apparent lack of data on the UK's imports of services from ASEAN is a serious omission given the UK's position in services trade and its special relationship with ASEAN.

Direct investment from the EG is quite substantial and rising absolutely but its share in the total inflow remains largely constant. The region is so buoyant that it attracts investment from the US and Japan with very high annual increments. Apart from the attractiveness of ASEAN in terms of growth (and prospects), the division of labour in the Asia-Pacific region prompted Japan to be the first to invest heavily in ASEAN to exploit their comparative advantages for relatively labour-intensive products. The Japanese example has been followed recently by Taiwan, South Korea and even Hong Kong despite its emphasis on subcontracting in China. In addition, Japan traditionally invests in ASEAN to gain access to raw materials and fuels. Therefore, growth rates of EC direct investment in ASEAN pale compared to the large inflows of direct investment from other sources. Moreover, EC investors have made relatively modest use of outward processing' provisions in EC trade policy with respect to ASEAN (for instance, in textiles and clothing they have typically preferred Eastern Europe and Mediterranean countries) while showing a preference for direct investment in developing countries with large domestic markets (that is, for local output, often behind protection). This means that, compared to Japan and to some degree the US, EC investments in ASEAN are not the source of ASEAN exports to the EC.(1)

Some ASEAN countries still receive substantial development aid, both from EC countries and from the EC as a group. The EC as a group has announced further increases in the aid, especially to Indonesia, the Philippines and Thailand. There is a direct connection with 1992 here since the doubling of the Community's Structural Funds under the 'cohesion' provisions of the Single European Act as well as the preparedness to step up aid to Eastern Europe had raised fears in ASEAN that the lesser developed countries of ASEAN would suffer as a result. EC Commissioner Matutes' medium-term development plan has put these fears to rest.(2 @ Finally, the EC-ASEAN Cooperation Agreement provides a framework for political and economic consultation as well as technical assistance. The Agreement neither provides for trade preferences nor for bilateral trade negotiations of any kind. Modest programmes of trade and development promotion have been initiated, as well as the 'Cheysson facility' for feasibility studies for EC-ASEAN joint ventures.

A closer look at EC-ASEAN trade

No attempt will be made to survey EC-ASEAN trade. The following will only provide some stylised facts about bilateral trade in a global context as a basis for a qualitative impact assessment of the impact of EC-1992.

The magnitude of product trade between the two groups is considerable but not large (see table 1).

In 1989, the EC imported ECU 15 billion and exported to ASEAN ECU 14 billion, both shares of extra-EC trade being 3.4 per cent. Growth rates were high during the 1970s and again in the late 1980s. For ASEAN the EC is much more important as an outlet than ASEAN is to the EC: the EC takes a little over 15 per cent of all ASEAN exports, up from 10.2 per cent in 1984. This is almost as much as the US (1 6 per cent) and little lower than Japan (20 per cent). The sharp increase of ASEAN exports to the EC is due to very high growth rates of manufactured exports, whilst agriculture/food and raw materials exports show comparatively modest growth rates (fuel exports to the EC are negligible).

This spectacular sectoral growth performance has, as shown in table 2, dramatically altered the structure of ASEAN exports, notably to the EC and the US, less so those to Japan.

There is a sharp reduction in ASEAN reliance on exports of food and raw materials a selective reduction in the weight of ores, minerals and fuels and a phenomenal increase in the share of manufactures exports. Trade with Japan in non-manufactures is somewhat of an exception partly as a result of the pattern of direct investment. The share of manufactures in exports to the EC increased two and a half fold, the US share almost quadrupled and the Japanese share rises more than five fold in a period of 13 years albeit from a small initial value. Although these strong increases are more or less reflected in the textiles and clothing sector, it is obvious that the rapid export growth must have spread to several other industrial sectors since textiles and clothing only make up between 1 0 per cent and 22 per cent of the industrial exports, dependent on the target market.

Table 3 provides a snapshot of the product composition of ASEAN manufactured exports to the EC in 1987. Other important export sectors-besides textiles and clothing-include wood and cork products other than furniture, off ice machinery and automatic data processing equipment (and components), telecom and audio/video apparatus and electrical machinery and appliances. The widening product scope is also apparent from the relatively high share for a category other manufactures', ranging from chemicals, and non-ferrous metals to footwear. Hiemenz (1988) shows that, in the mid-1980s, ASEAN had achieved an export pattern remarkably similar to that of the non-ASEAN Asian NICS. As ASEAN is no longer relying on being a primary goods exporter, its interest in the product market aspects of 1992 is significant. Even indonesia and the Philippines have recently begun to implement long-run strategies of export-led growth by means of promotion of manufactured exports, facilitation of direct investment, competitiveness campaigns, deregulation and some liberalisation. This tends to raise the sensitivity in ASEAN about future restraints or rising costs of market access to the Community due to 1992.

At the aggregate sector level (one-digit SITC) the changing export composition of ASEAN would seem to indicate a gradual shift from inter-industry EC-ASEAN trade to intra-industry trade (ITT). As shown in Schmitt-Rink and Lilienbecker (1990) this apparent characteristic of the exchange vanishes at the three digit SITC level more clearly for textiles and clothing than for electronics (electronics other than computers and audio-video may reach ITT ratios up to 0.44 for 1988). Specialisation between the EC and ASEAN is still largely 'vertical' and accords with what one would expect from a neo-factor proportions theoretical perspective of the international division of labour.

The external dimension of 1992: a confusing debate downplaying the benefits?

A general treatment of the external dimension' is beyond the scope of this paper (see amongst others, Beuter and Pelkmans, 1989; Pelkmans, 1990; Page, 1990). This section will be limited to a few general, but frequently overlooked points, and a survey of the main issues.

A proper understanding of 1992 and its external dimension requires a clear distinction between existing trade policies of the Community and the external aspects of the 1992 programme. In formal terms there is no connection between the two. In material terms they may be related in two ways. First, and by far the most frequently encountered, third countries are interested in the future access to the EC market, and it is immaterial for them to distinguish the policy origin of measures that may impede access or make it more costly. Of course, this is a valid instance of positioning from a third country's point of view. Nevertheless, it leads to discussions about 1992' which go beyond the well-defined purpose of the '1992' programme. it is not a primary aim of the White Paper nor the Single Act to alter trade policy as such.

Second, and little recognised, let alone given an adequate treatment in terms of political economy, 1992 is so sweeping and broad in (sectoral) scope that it is capable of loosening or undermining old coalitions-based on such factors as entrenched positions, regulation, other protection, even monopoly rights-which kept long-prevailing protection in place. In doing so, it unexpectedly contributes greatly to a new, and more vigorous free(r) trade orientation of the Community, consistent with the pro-market and liberalising spirit of 1992 as a programme. Thus, the EC has (unilaterally) removed a large number of national quotas in three tranches in 1989 and 1990. The EC is pursuing a vigorous policy to employ world standardS(3), as the basis for the thousands of European standards to be agreed. Neither Japan nor the US have ever seriously pursued this road even though the GATT Code calls for it. Thus, in some sensitive dossiers such as telecom terminal equipment and cars the EC has opted for free trade (subject to non-discriminatory certification, which in itself is also a gain), thereby breaking open deeply entrenched positions of many national players. In the car case the surprise is not that previously protected producers attempt to prolong the transition period and stagger the opening up by arguing for inclusion of the output of transplants' into the quota (or VERS), but that the national quantitative restrictions will have to go! Before the 1992' programme was embraced, national quantitative car protection remained an untouchable taboo.

A survey of the external dimension rapidly becomes unmanageable in view of the very broad scope and technical detail of 1992. It is useful to concentrate on the products and services markets, but there is a cost to it: domains such as property rights, company law, merger control and some labour market issues as well as immigration and border checks on persons will be neglected.

Products and services markets are subjected to horizontal and vertical 1992 legislation. The major horizontal domains are border control issues, technical barriers, indirect taxes and public procurement. All these categories have, however, sector-specific aspects to them as well which complicate the impact-assessment considerably. Examples include the specifics of border controls for the various modes of transport, the highly specific nature of (the removal of) technical barriers even in the 'new approach', the excise taxes in the fiscal dossier and the 'excluded sectors' in public procurement.

The vertical measures are numerous. In product markets, agricultural products assume a special place due to the ambitious and technical programme to remove veterinary and phyto-sanitary barriers. Health issues are the most sensitive of all regulatory issues and hence the requirements that have to be met before removing intra-EC border controls altogether are severe. They include adequate, reliable and permanent controls in the country of origin and adequate financial compensation mechanisms for farmers when massive slaughtering is imposed by the EC. The upshot will be a rise in health standards in some EC countries, but it would be wrong to conclude that this will reduce the 'comparative advantages' of these countries in the common market. The ex-ante situation is simply that they cannot export, unless they guarantee the standards of the destination country. The assumption is that the health requirements are broadly supported by the population, and hence codify' the demand of the well informed consumer; in other words, where health is important, well-informed consumers would not demand low standard plant or animal products. Therefore, after certification and inspection systems have become equally ambitious in the EC, they will facilitate intra-EC exports especially for those countries. To extend these control systems to third countries is demanding but (as the US case demonstrates) is not impossible. However it does require detailed and permanent cooperation (if not harmonisation) with respect to requirements, inspection and certification. A different question altogether is whether, in general, health requirements go up in the EC; this issue would seem to go beyond 1992 as such.

In industrial markets a useful distinction can be made between GATT-controlled issues and 'beyond-GATT' issues. The most important issue by far in the former group is that of national quantitative protection, especially in textiles and clothing, footwear, cars and consumer electronics. In addition, in sofar as technical barriers fall under the GATT Code, the specific sectoral impact may be important for, say, ASEAN (for example, toys and jewellery; perhaps some machines; electrical/electronic equipment subject to 'electro-magnetic compatibility' because they might degrade performance or cause interference).

In the beyond-GATT' field the sectoral impact of public procurement in the 'excluded sectors', viz, public transport, supplies to utilities and to telecom administrations and the reciprocity provisions are a major issue. To the extent that the removal of technical barriers goes beyond the (very modest) GATT Code it would also have to be classified here.

GATT does not (yet) play any role with respect to services. The key areas to single out for an understanding of the external dimension include financial services (banking, insurance and securities), telecom services and all (six) modes of transport but especially maritime, road haulage and civil aviation.

Even if one excludes the 1992 measures in the factor markets, the impact on direct investment and various forms of intercompany collaboration ('alliances') between 'insiders' and 'outsiders' would appear to be too important to be ignored.

Beyond this question, one enters highly speculative issues such as the external effect of greater competitiveness of EC firms in terms of costs, quality and innovation. The stylised simulation in the Cecchini report (EC, 1988), based on the realisation of cost savings, leads, ceteris paribus, to a reduction of extra-EC imports (of manufactures) up to 1 0 per cent. Clearly, if one is sceptical about the Cecchini results, then one can be less pessimistic about this import reduction caused by greater EC cost competitiveness. This paper will not go into the calculations based on import demand elasticities and expectations of macroeconomic growth. it has been done elsewhere (Kol, 1989; Mc Aleese, 1990 and so on). These simple calculations concur in that the EC's augmented import demand in the medium run, caused by 1992-induced growth, would more than compensate the expected fall in imports due to improved competitiveness. However, this aggregate effect should be verified for sectors and regions, such as ASEAN.

Agriculture and food products

The 1992' effects on the access to the single food market are relatively small. First, the nature of the CAP is hardly touched by' 1992', although the level of prices is. The February 1988 decisions to double the Structural Funds were made possible by a mini-reform of the CAP, which is expected to exert-and indeed has already exerted-downward pressures on the EC price level. Since a reduction in the guaranteed EC price level will diminish the export subsidies for CAP products dumped on the world market, it must imply ceteris paribus) a rise in the level of world prices. Whereas the impact on EC imports is probably negligible given the nature of CAP protection, the effect on world markets will be positive for food exporters and local food suppliers competing against imports from the EC. ASEAN may therefore enjoy some modest benefits from a (ceteris paribus) less depressed world market in temperate zone products. its agricultural and food exports are, however, overwhelmingly of the non-competing kind, that is, tropical products. Thailand and indonesia also export cassava (tapioca) which is a grain substitute for animal feedstock, but the true competitor here is the US with its exports of soy beans and corn gluten to the EC.(4)

Second, the monetary compensatory amounts (mcas) will be removed. According to Matthews and McAleese (1989) the switch-over system will gradually be abolished which should decrease the level of protection in the medium term (if Germany is compensated temporarily).

Third, coffee and tea excise duties will have to go. ASEAN is a very modest exporter of coffee (Malaysia and Indonesia) and might benefit from an estimated increase in EC coffee imports of ECU 650 million (Davenport, 1988), due to the removal of the high German coffee excise (41 per cent) as well as those of Denmark (1 5 per cent), italy (9 per cent) and Belgium (6 per cent).

Fourth, some specific cases (such as, bananas; seasonal quotas from Mediterranean countries on non-tropical products) will not affect ASEAN.

Fifth, the only major field where problems might perhaps arise is in the technical health) regulations about food requirements and inspections. This field is not well surveyed from an economic point of view. For an appropriate evaluation-that is, not merely checking the few incidental complaints-enormous amounts of accessible information about health requirements in food are needed, as well as about their alternatives, costs and (social) benefits. Moreover, one should attempt to separate the 1992' effects from the very susbstantial regulatory provisions which existed already for processed agricultural products and food. All this is highly ambitious and, to my best knowledge, no such work would seem to be available. The key export products of ASEAN to pay attention to are vegetable oils (especially palm oil and coconut oil) and residues of such oil (such as bran and oil cake), processed vegetables, processed fruits and juices, canned pineapple, and, less importantly, tobacco, dried fruits and nuts, cocoa, sugar and even cereals (Nieva and Faigal, 1988). I suspect the '1992' impact to be marginal in processed agricultural products but not necessarily in fish and fish products (such as shrimps), where health problems arising from ASEAN imports have been observed repeatedly. One additional reason to expect no major changes is the prevailing case-law on the mutual recognition of (non-essential) national provisions about food and drinks. The Cassis-de-Dijon case-law emerges from cases in food and many of its refinements. (5) The case-law predates the 1992' process, although 1992' has enhanced awareness, no doubt. Essential for ASEAN is the fact that Cassis-de-Dijon applies to ASEAN suppliers as well; were ASEAN to export beer to any EC country other than Germany, and legally market it there, it could then proceed to sell beer in Germany.

Industrial products GA TT controlled

By far the most important issue here is quantitative protection. The problem having received most publicity is that of cars. ASEAN enjoys free access to the EC car market. Although Malaysia intends to boost its car exports, the volumes shipped hitherto are so small that this supply can be neglected for the next few years. This leaves textiles and clothing, footwear and consumer electronics.

ASEAN's interest in textiles and clothing exports to the EC are great. Detailed Commission proposals are not tabled yet because the MFA negotiations, tied this time to the Uruguay Round, are not completed. The 1992 requirement is clear: national quotas-and hence, Art. 115, EEC annual authorisations(6)---monitoring and statistical surveillance mechanisms for potentially sensitive MFA products at national level will have to be removed. There are in principle four possible solutions: EC quotas (which do already exist and hence there should be no immediate fear of more restrictive joint quotas), tariffication, removal of national quotas without any substitution and VERS. Tariffication is considered too complex to negotiate. Also, one surmises that the protectionists like to cling to volume protection, given the, at times extremely low cost levels of outside suppliers. Removal of quotas for categories, with consistent underutilisation of both national and EC quotas is feasible.(7) VERs are unlikely since the main reason for their frequent use-targefting one or only a few countries-is invalid in textiles and clothing. Moreover, compliance of VERs hinges on conditions which are not fulfilled in this sector: supplier companies are too numerous, the wholesale/retail linkages too flexible and off-shore processing rules too complicated. ASEAN should thus expect EC quotas for the sensitive categories.

If quotas remain as they are (ignoring here the traditional upward adjustment, usually 6 per cent a year, except for dominant suppliers), Davenport and Page (1989) expect EC imports to rise by perhaps 3.1 per cent to 5.2 per cent only on account of EC-1992. The reason is that the transfer restrictions for national quota's among EC countries fall away. Their simulation shows that Thailand and the Philippines would probably benefit most. The EC has already begun to reduce the restrictiveness of national quotas: in the case of dominant suppliers the permifted transfers for 1991 have gone up to 8 per cent; for other suppliers (like ASEAN) 16 per cent. Further augmenting these transfer possibilities would eventually remove the rationing effect and existing EC quotas would suffice.

Whether the EC will stop applying the MFA hinges first of all on the US position (which is more protectionist) and secondly on the safeguard clause negotiations in the Uruguay Round. The internal EC problem is compounded by Iberian EC membership since this has dramatically reduced Spanish and Portuguese quantitative and tariff protection vis a vis third countries textiles and clothing suppliers. Spain experienced increases of 82 per cent in 1987 and 75 per cent in 1988 of imports of clothing from non-EC sources; in textiles, the growth rates are 40 per cent and 30 per cent. The question is whether adjustment and improved competitiveness in the two countries may reduce these extreme import growth rates; if not, this would undoubtedly strain the liberalisation process.

The case of footwear is more simple. In the middle and lower market segments of leather footwear as well as all non-leather footwear, EC industry is under heavy competitive pressure due to comparative disadvantages or (in the case of sports shoes for example) late application of new technologies. Non-EC imports shot up by 69 per cent over the period 1985-8, with intra-EC imports stationary and consumption rising less than 2 per cent a year; hence the penetration rate (imports as a per cent of 'apparent consumption') rose very fast from 25.5 per cent (1985) to 42.8 per cent (1988). The inroads are especially made by China and East Asian NIES. ASEAN's exports to the EC are still small (mostly Thailand) but Indonesia is currently investing heavily in the shoe industry for export purposes. It should not be forgotten however that in the upper leather segments the EC industry is an unchallenged market leader worldwide. EC producers increasingly turn to CAD-CAM and other results of the BRITE programme, as well as just-in-time methods in order to regain or maintain an edge over non-EC imports.

The threat for ASEAN would seem to be minor. If there is one, it would, curiously enough, arise from recent liberalisation by the EC! In footwear the EC traditionally maintained a large number of national quotas on imports from Eastern European countries, sometimes on all 'state-trading' ones. All quotas on Eastern Europe have been removed within the last 12 months, which may soon lead to greater inroads of low value added shoes from Eastern Europe, which may well further increase protectionist pressures. Eastern European export performance would certainly improve dramatically if joint ventures with or direct investment by EC firms would improve quality and marketing. The EC as a whole maintains VERS, with South Korea and Taiwan. Note however that Italy, France, Spain and Portugal maintain safeguard clauses the application of which sometimes leads to Art. 115 authorisations or VERS. The VERs in this splintered industry with its fragmented distribution are unstable, hard to monitor and generally short-lived. For this reason there is industry pressure for EC-wide quotas after 1992 but it is likely that the Community will prefer the VER method for dominant suppliers only. ASEAN is therefore unlikely to be hit. The problem for ASEAN might be a commercial one: as competition on the EC market heats up making inroads will be hard.

In electronics three subsectors are of importance for ASEAN exports to the EC: semi-conductors, consumer electronics and telecom components (mostly) for terminal equipment. The first two subsectors are GATT controlled', but in semi-conductors there are no aspects which properly apply to 1992 (origin rules are not related to the White Paper). Even in consumer electronics the few modest quota problems pale compared with other issues such as anti-dumping, (TV) standards and tariff reshufflings. The quotas (with occasional use of Art. 115 authorisations) and VERs of Italy, France and Spain are all directed against Japan and the East Asian NIES, not against ASEAN. The EC has already employed some common VERs vis a vis Japan and South Korea. The few national quotas left will probably be removed altogether as they have become irrelevant (for example, France on black and white TVs).

Other issues which are GATT controlled include the application of the GATT standards code to the 'new approach' and other '92 initiatives about technical barriers. Not only does this present few special problems, the cost savings and the liberalisation effects should be expected to be positive also for ASEAN.

Beyond GATT

Besides services-which are obviously beyond GATT'-the beyond GATT' items in the 1992 programme consist of public procurement in the 'excluded sectors' and a few issues in the field of technical barriers

Public procurement among the previously excluded sectors is of importance for ASEAN with respect to telecom terminal equipment and components. For components there is free access since it is the supplierS(8) which source and purchase. The terminal equipment market falls outside the GATT Procurement Code. The 1992 programme has liberalised this market completely: since June 1990 an EC Directive is in force requiring free competition in the sales of equipment to individual subscribers or companies, in installation and maintenance services. This applies to telephone sets, modems, telexes, data transmission terminals, PABX or branch exchanges, mobile phones and, if isolated, also to satellite receivers. Related Directives deal with the approximation of technical specifications of terminal equipment, including the mutual recognition of their conformity. ETSI (the European Telecommunications Standards Institute) will write the new EC-wide standards as well as the conformity testing requirements. The free competition in this huge and rapidly growing market extends fully to

third countries. ASEAN could seize the opportunities here.

The remaining issues in technical barriers would seem to consist of two minor ones. First, the GATT Code has no provision on the harmonisation of the 'essential requirements' themselves. Thus, whenever the EC formulates Directives with 'essential requirements' there is little guarantee that they are not more demanding than the requirements that ASEAN exports might meet in the US or Japanese market. In the 1992 programme the EC has pledged to utilise world standards whenever they exist and conform to the 'essential health or safety requirements'. This may solve issues of technical detail but not the more fundamental questions of harmonisation as reference-to-standards cannot supersede the obligation to adhere strictly to the 'essential requirements' in EC law. Whereas this is generally less of a problem in matters of safety (however, electro-magnetic compatibility' is a major exception), it is a major and perhaps increasing problem in matters of health as EC consumers and governments alike have become more and more critical of additives and other health issues. Second, higher standards may emerge, as a result of harmonising regulatory interventions in the context of 1992. Although this is not a systematic trend, some instances may cause problems for specific exporting countries.

An example of great relevance to ASEAN is in jewellery.

The ASEAN interest is in 'real' jewellery (that is, with precious metals and precious stones), imitation jewellery and costlime jewellery (the latter covers a larger spectrum of decorative items such as brooches and hairclips). For precious stones voluntary standards remain the unquestioned basis for trade; in costume jewellery there is a special problem of commercial property rights (marks and designs); both are not really affected by '1992'. However, a 'new approach' draft directive is in the making, dealing with hallmarking, minimum gold carats requirements, test methods and advertising for jewellery. Moreover, an environmental draft directive on batteries will affect watches and the like. Finally, VAT rates on jewellery diverge enormously. The EC proposal will amount to self-hallmarking and a harmonised set of products for which this will be mandatory (noncompliance is fraud). Third countries will be treated identically, but, since fraud must be effectively punishable, exporters will be required to appoint authorised representatives. Obviously, this will inhibit small suppliers from ASEAN. Carat requirements would not seem to present problems for ASEAN (Asian traditions prescribe very high carats), rather for some EC countries. Test methods will be entirely based on ISO methods, although there is a sensitive issue of what precisely 'plating' is (3 microns of gold for jewellery and 5 microns for watches), which may affect competitiveness marginally.

The point is that the new approach' may sometimes raise average standards, although this does not necessarily have to mean a ban on imports (nor, incidentally, should it be condemned as such: an assessment of the information requirements for the consumer may justify minimum standards).


Since services are 'beyond GATT' the key underlying issue is that of reciprocity. Giving national treatment' with respect to the right of establishment, ownership and the free provision of services is exceedingly rare in the world economy. Studying the examples of EFTA countries, Canada, Japan or Singapore which all pursue fairly restrictive services policies shows the nature of the EC problem: liberalising far ahead of everybody else may lead to very unequal possibilities for international expansion in services for EC-headquartered as compared to non-EC service providers.

For certain modes of transport and financial services the discrepancy between the US and 1992 is also considerable. In an age of globalisation of services, the sole granting of national treatment between the US and the EC amounts to almost unrestricted access to the whole EC market for US service providers, without granting EC providers similar internationalisation opportunities in the US market.

The reciprocity debate has now passed the stage of fortress Europe'. In financial services reciprocity will not be applied retroactively, it will not mean mirror' reciprocity but 'effective market access' and 'national treatment' together. For ASEAN two provisions are of importance: the degree of development will be taken into account and the removal of exchange controls will not be part of the assessment of 'effective market access'. The actual application of 'reciprocity' in financial services therefore will probably only hit Singapore as being (almost or fully?) developed. Singapore does restrict access in various ways and has been among the six countries mentioned by Sir Leon Brittan.(9) However, note that the presence of ASEAN's financial institutions in Europe is minimal at the moment.

Of the other services where 1992 plays a major role, by far the most important case for ASEAN is air transport (other ASEAN services will only marginally be affected by 1992). ASEAN airlines have emerged as major, low-cost, high quality competitors to the larger OECD airlines. Their interest in the external dimension is threefold:

the access to the internal market of scheduled services

the impact of 1992' on the organisation of the world market for civil aviation

the impact of the restructuring of EC (and EFTA) air transport on the competitiveness of EC airlines, and the emergence of Euro-megaairlines.(10)

The external dimension will require renegotiation of Air Services Agreements ASAs),(11) previously concluded between Member States and third countries. Not counting Denmark, there are 609 such bilateral agreements. Moreover, other bilateral arrangements such as Memoranda of Understanding, Exchanges of letters, Agreed Records, and such also exist. Finally, almost all ASAs have confidential annexes on capacity and frequency, sometimes on tariffs and other aspects. At present the situation is merely being analysed and an internal EC debate has begun on the legal basis for external negotiations. It is therefore too early to foresee how these renegotiations will be conducted. In any event, one has to keep in mind that the main point for the Community will be-indeed 'must' be, from a single market point of view-to eliminate differences in access or competitive conditions between Member States in their air transport with any particular third country X. In a number of cases, also-one presumes-in that of ASEAN, this will lead to adaptation of access, the introduction of 'gateways' to the EC and possibly the alterations of frequency and capacity specifications in existing bilateral agreements. Since air transport has extreme mercantilist traditions, one can understand the anxiety in ASEAN about the possibility of future power-play by the EC when renegotiation begins. Moreover, there is a problem of competition policy and its extra-territoriality when intercontinental alliances of airlines are formed which may well create dominant positions on certain routes, or indeed major hubs, or with respect to distribution and marketing (for example, frequent-flyer tie-in arrangements; computer reservation systems).

Impact on direct investments

There is a well-established economic literature suggesting that successful market integration attracts direct investment (for a survey, see Balassa, 1977). In ASEAN there is a fear that 1992 makes the Community so attractive to invest in that direct investment flows towards ASEAN will suffer. Some observers have even coined the term 'investment diversion', although this word may unfortunately suggest a parallel with trade diversion. Trade diversion, caused by regional integration, is welfare-decreasing for the world as a whole whereas 'investment diversion' has not been analysed in a theoretical framework, capable of showing welfare effects.

Five distinct arguments behind the fear for 'investment diversion' so often expressed in ASEAN can be identified:

(a) 1992 will boost investment in Europe. No doubt factually correct, it does not follow, however, that EC business will, or would need to, divert investible funds, destined for ASEAN, to Europe. if prospects are good in both regions-and they are-there should be no problem in financing sound projects in both regional markets. In the short run and only for firms beginning to reach beyond the EC, investment choices may be constrained by management and human resources bottlenecks as well as overall borrowing capacity: in such cases, if the EC option is chosen the ASEAN one may temporarily be shelved. This assumes substitutability between the two investments. If local production in ASEAN is for ASEAN or Asia-Pacific market outlets, substitutability with an EC option tends to be low, irrespective of l 992'. If there are outward-processing or other intermediate exports back to Europe, substitutability is purely a matter of relative costs, but it is questionable whether this kind of investment is influenced by 1992.

(b) The EC-South, especially Spain and Portugal, compete with ASEAN for direct investment. Membership of Spain and Portugal was negotiated before the '1992' programme. Given relatively low wages and the prevailing industrial structure, Iberian exports are likely to compete with many manufactured export products from ASEAN. it is therefore possible that adjustment processes in the Community do not lead to exit from comparative disadvantage sectors but to relocation to Spain and Portugal, perhaps in some cases as an alternative to ASEAN. 1992 can augment this effect, especially because the doubling of the EC structural funds and their better management may improve the investment climate and infrastructure significantly. However, these intra-EC relocations constitute only a part of the spectacular increases in direct investment inflows into Spain and Portugal. In many instances the decisive motives for investment bear no relation to ASEAN: investors from EFTA, Japan, the US and Canada, once having opted to invest in the EC because of 1992', frequently choose Iberia; EC investors expect sustained growth in the two countries for years to come and invest in marketing, distribution or local manufacturing if proximity to customers is critical; investment in the services sectors is strong and responds to the deregulation prompted by 1992 and opportunities arising therefrom. For all these reasons one would expect the possible substitution effect, if present at all, to be small for ASEAN. Finally, one should not forget that the rapid external liberalisation of Spain, as an EC member, has boosted imports from ASEAN and exerts great adjustment pressures: direct investment therefore will facilitate the necessary jumps up the ladder of higher value-added products, which are largely beyond the present export capacity of ASEAN, except for Singapore. In this sense the trade/ liberalisation/investment nexus may actually benefit ASEAN as well as Spain and Portugal.

(c) Eastern Europe's opening will attract direct investments especially from the EC and EFTA. The fear with respect to Eastern Europe is that the great needs for western direct investment and technology can be equated with great opportunities. There is also a presumption that European business will be less interested in 'globalisation', which would reduce the interest in investing in ASEAN. Both fears cannot be taken for granted. EC business has been rather prudent about investing in Eastern Europe up to now and has certainly not diminished its interest in globalisation. 1992 has received strong business support precisely because it would improve home market conditions as well as competitiveness, with a view to better performance in global competition. Moreover, prospects for growth and profitability in Eastern Europe are anything but bright in the short to medium run and highly uncertain in the longer run. Otherwise the points about substitutability mentioned before also apply here.

(d) The rapid 'rapprochement' between the EC and the Mediterranean may also reduce the interest in investing in ASEAN. Since the 'rapprochement' is largely political and has not led to closer market integration, in the form of free trade areas or (new) associations, this argument is far-fetched. What can be observed, however, is that Japanese and US firms invest in Mediterranean countries such as Turkey precisely because access to the EC is almost entirely free of barriers. The question is whether this investment is diverted from ASEAN.

(e) The Community has sometimes given the impression that 1992 might lead to a Fortress Europe in some sectors. The main purpose would be to attract local manufacturing investment substituting for imports from NIEs and, of course, Japan. If this argument were correct, 'investment diversion' would indeed assume a meaning comparable to trade diversion: it would be welfare-decreasing for the world. Yet, the argument has probably no validity in the case of ASEAN. First, Fortress Europe is not caused by 1992. There are instances of prevailing EC trade policies (for example, specific origin rules; anti-dumping) which might have prompted Japanese and Korean firms to invest in the EC. On the other hand, 1992 tends to reduce EC protection in a number of important product markets and opens up the EC in services markets and public procurement, be it that in the latter cases the access of outsiders may be improved less than that of insiders, due to reciprocity provisions. Second, even if there were instances of investment prompted by fears that 1992 would turn the Community into a Fortress, ASEAN would only lose out if US and Japanese production in ASEAN generates export flows to Europe which could be substituted by investment in Europe. However, this is typically not the case: US and Japanese multinationals in ASEAN export almost entirely to neighbouring Asian countries and to the home countries, frequently as intra-firm trade.

Therefore the assertion about investment diversion caused by EC-1992 or the transformation of Europe more generally is weak and largely unfounded. Apart from the specific reasons advanced earlier, two general arguments underscore this. First, direct investment depends on business prospects and profit expectations and they are excellent in ASEAN. Investible sums are not fixed, except in the very short run, hence business plans in ASEAN can be financed irrespective of '1992'. Second, EC business has regained confidence and initiative and can be expected to grow more competitive worldwide. This development will accentuate tendencies of 'globalisation', which brightens the position of ASEAN for attracting direct investment from Europe.

The sensitivity to a reduction of EC direct investments in ASEAN has deep-seated reasons. Prominent among the anxieties is the domination of Japan in the region. With very rapid increases of trade among Pacific Rim countries, fueled by large inflows of direct investment from Japan and a growing dependence on intra-firm trade between Japan and ASEAN, there is a fear of becoming a backyard of Japan which is ill-received for both political and economic reasons. Up to a point this dominance is a natural development. US direct investment is dominant compared to Japanese and European investment in Mexico and Canada; the EC is dominant in EFTA and the Mediterranean, and eventually will be in Eastern Europe. The ASEAN desire for 'balancing' has non-economic motives which may generate disatisfaction if the objective is set at an unrealistic level, such as 'equality' of stocks of direct investment from the three main OECD markets.

A final word

There are several traditional trade policy issues which strain the relation of ASEAN with the Community such as the CAP, GSP-especially its complexity and exceptions-and the MFA. Anti-dumping cases vis it vis ASEAN countries have been rare up to now although there is concern about the EC's attitudes once export successes affect local business in the Community.

Compared to these major issues, 1992' is to be seen as a very positive development with great opportunities for ASEAN in some product markets as well as in air transport. The uncertainties about the precise restrictions in textiles and clothing and in footwear, as well as the uncertainty about standards in general create some anxiety however. in air transport, this anxiety is even greater as neither tradition nor the Chicago Convention (regulating air transport relations among nations) provide any guarantee for an open and liberal treatment. Since one cannot speak of one ASEAN air space' in any operational sense of the word, and since national 'hubs' and airline interests are not only complementary but also conflicting, it might prove very difficult for ASEAN to team up in the future negotiations with the EC.

Most important for ASEAN is that the EC becomes more open generally, especially since EC growth prospects are good compared to the past and better than those of the US in the next few years. The 1992 processes contribute to these bright prospects which is crucial for the market opportunities ASEAN will wish to exploit.


(1) Wagner (1989) reiterates the serious data problems leading to a misleadingly high share of EC investors in overall foreign direct investment in ASEAN: the great discrepancies between the widely published data on 'approved foreign investments' in the various ASEAN countries and the amounts actually realised later, with the realisation rates always below 50 per cent. Based on source country statistics the (incomplete) picture of EC direct investment shows that it lay far behind Japan and the US up to 1986/7. Later data are exclusively on an approval basis and show a rise in the EC share.

(2) Issues relating to aid are not dealt with in this article.

(3) Since the stock of world standards is decidedly incomplete for the purposes of 1992 and since they often contain compromise formulas, the adoption of world standards as EC standards can only take place where they exist and where their quality is sufficient for the new approach', that is for the presumption' to live up to the 'essential health and safety requirements' which allow the free movements of goods in the internal market.

(4) Thailand is subject to a VER imposed by the EC since 1982 which, given the gap between EC grain prices and US substitutes on the one hand and the cost competitiveness of cassava on the other hand, provides room for large rents for thai business; nobody else in the world imports cassava on a large scale).

(5) For a survey, see Wyattand Dashwood, 1990, chapter 10.

(6) See various essays in Volker, ed., 1987 for detailed explanations. The essence is that the authorisations to apply intra-EC border controls so as to enforce national quotas will no longer be given.

(7) As early as 1986, during the MFA-IV negotiations, the EC launched this idea but failed to get it accepted by other importing countries in MFA.

(8) Not the Telecom Administrations, except for servicing.

(9) In a speech to the Bankers Association, in London in June 1990.

(10) The paper limits itself to a few notes on the first question.

(11) This must take place since access to bilateral routes is restricted to air lines from the EC country which has concluded the bilateral agreement. in a single market, however, every EC airline must in principle enjoy access to any route originating in the EC if it would wish to offer such services. Since the bilateral agreements prevent this access they must be renegotiated.


Balassa, B., (1977),'Effects of commercial policy on international trade, the location of production and factor movements', in, B. Ohlin et al, ed 5, The International Allocation of Economic Activity, London, Macmillan.

Beuter, R. and J. Pelkmans (1989),'The external dimension of the internal market, a survey', paper presented to EC-ASEAN conference on 1992, Kaula Lumpur, July.

Davenport, M. (1988), 'EC trade barriers to tropical agricultural products', ODI Working Paper, 27, London, Overseas Development Institute.

Davenport, M. and S. Page, (1989) Regional trading agreements: the impact of the implementation of the single European market on developing countries', Report to UNCTAD, London, ODI.

EC, (1988), The economics of 1992', European Economy, no. 35, March.

Hiemenz, U. (1988), 'Expansion of ASEAN-EC trade in manufactures: pertinent issues and recent developments', The Developing Economies, vol. 26,4 (Dec.)

Kol, J. (1989), The EC after 1992 and the developing countries', (in Dutch) Economisch-Statistische Berichten, 26 July.

Langhammer, R. (1989), The EC internal market and ASEAN-EC trade in services', in N. Wagner, ed, ASEAN and the EC, the Impact of 1992, Singapore, ISEAS, (forthcoming).

Matthews, A. and McAleese, D. (1989), LDC primary exports to the EC: prospects post 1992', paper for The Hague conference of Dutch Ministry of Foreign Affairs, October.

McAleese, D. (1990), The EC internal market programme: implications for the external trade', in N. Wagner, ed ASEAN and the EC, the Impact of 1992, Singapore, ISEAS, (forthcoming).

Nieva, C. and G. Faigal, (1988), Processed agrictultural products: issues for negotiation between ASEAN and the EC', in R. Langhammer, and H.C. Rieger, eds, ASEAN and the EC, Trade in Tropical Agricultural Products, Singapore, ISEAS.

Page, S. (1990), Some implications of Europe 1992 for developing countries', Paper presented at the OECD Development Centre, Paris, June.

Pelkmans, J. (1990), Completing the EC internal market: an update and problems ahead', in N. Wagner, ed, ASEAN and the EC, the Impact of 1992, Singapore, ISEAS (forthcoming).

Schmitt-Rink, G. and T. Lilienbecker, (1990), An analysis of EC-ASEAN trade in textiles and electronics, 1980-8, in: N. Wagner, ed, ASEAN and the EC, the Impact of 1992, Singapore, ISEAS (forthcoming). Volker, E. ed, (1987), Protectionism and the EC, Deventer, Kluwer, (revised version)

Wyatt, D. and A. Dashwood, (1990), The Substantive Law of the EEC, London, (Sweet and Maxwell).
COPYRIGHT 1990 National Institute of Economic and Social Research
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Association of South East Asian Nations and European Community relations after the effectivity of the Single European market in 1992
Author:Pelkmans, Jacques
Publication:National Institute Economic Review
Date:Nov 1, 1990
Previous Article:The effects of the single market on the pattern of Japanese investment.
Next Article:The implications of closer European integration for Australia and New Zealand.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters